Is this a bad deal because of mortgage rates?

Question

List Price: 235k

Reno: 45k

ARV: $340k

HOA: $100 / month

Zillow Rent Estimate: $2,300

I couldn't find any information on current investor mortgage rates, so I used 8.1% (my HELOC interest rate) for the calculation. My credit score is 790 but since I'll be using my HELOC to purchase the property, it'll probably drop to 740.

From the mortgage calculator below, the monthly payment would be $2,340. I just wanted to double check that I did all of this correctly. It seems crazy that a house listed this much under ARV still doesn't work out to be a good deal with these rates.

Emily Lien · Answer

Oh! I did do the research I could. By the 2010 census, the population has grown by 20% since 2000. It's a relatively diverse neighborhood. Only 7.7% is under the poverty-line. Well-educated area with over half having done some college.

I meant that I don't know anyone personally from that area, so I think the best I could do is read about it and drive around.

Scott E. · Answer

IF your numbers are correct, this would make for a good flip. Buy it for ~$200k to give yourself a little more room. But I'd try to flip this deal and walk away with $35-$45k (again, that's only assuming your rehab and ARV numbers are correct).

Steven Goldman · Answer

@Emily Lien  From a lending perspective it is a flip or a no go. It does not cover for debt service coverage purposes. If a lender will not give you a loan on it due to insufficient debt service coverage, you should not buy it as a hold. In my opinion is a flip is too tight. Values are likely to fall, rents also, rates could rise during rehab. and the project could cost over run. Three strikes its outta here. Good luck!

Jaron Walling · Answer

@Emily Lien "I'm not that familiar with the neighborhood (1hr drive from me)." - Everything was good... until you presented this red flag.

Get familiar with the neighborhood asap or don't do this deal. You're a detective now!

Emily Lien · Answer

I might be totally wrong but I don't see rents increasing that much more. I see headlines of people being priced out in locations nationwide. I don't know how much higher it can go, since wages aren't keeping up.

Emily Lien · Answer

Thank you @Nate Sanow , this would be my first deal. I have some extra money to cover expenses, but I'm unsure if this is where I want my money to be deployed. I'm not that familiar with the neighborhood (1hr drive from me). From what I read on the Wiki, this is a middle-class, growing suburban neighborhood. This actually is an off market deal from a wholesaling company. The condition of the house is perfectly liveable but just requires some cosmetic updates.

@Jaron Walling yes the comps were recent. In fact, there are two under contract. One for 320k and the other for 340k.

@Scott E.That's a great idea. I was so focused on never selling that I failed to see that a flip would work great for this. I believe the numbers are correct. There are currently two similar properties under contract for 320 and 340.

Nate Sanow · Answer

That is a tight deal.  Many won’t do it because they only do deals with lots of positive cash flow.  Here are reasons why I would say to do it

1. If its your first deal and you see value in getting some experience

2. If you won’t ever do a deal if you pass

3. If you can afford the extra money out of pocket to cover expenses

4. You believe that even by holding 1-2 years there is a good possibility that value will increase and you can offload it as a slow flip of sorts, and make a good return off appreciation not just CF

On the other hand here are reasons not to do it:

1. You can find a better deal with some networking and looking into the “off market” opportunities in your area

2. You can find something else that needs value add, get a similar house but its a fixer, either do a brrrr or if not full brrrr find something ugly you make nice and get premium rents

3. If you can’t afford to cover the negative CF and the fact that you will certainly come out of pocket for literally all maintenance issues.

Nicholas L. · Answer

@Emily Lien

can you share more about what your goals are?

if your goals are "buy a strong first deal" - this doesn't seem like a strong first deal

you'd have a bunch of equity stuck in it and a low CoC

Eliott Elias · Answer

I wouldn't take that, even if rates were 2%

Dan H. · Answer

Cash flow is very negative when accounting for all expenses so not a good BRRRR.

Too lean to be a good flip. $280k + selling costs ~$25k + holding costs ~$10k = ~$315k. $340 - $315k = $25k which is too lean for the effort and risk.  Note if market falls 5% that equates to $17k.  It is rare to not find unexpected items and/or increased costs during renovation so $45k could easily turn into $55k.  Trouble selling could increase holding costs.  If you could get it for closer to $200k then it could be a decent flip.

Good luck

Is this a bad deal because of mortgage rates?

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